A New Window on China's Growth

The country's much-anticipated, more accurate economic census indeed reveals a nation that's economically healthier than most thought

The guessing is over -- sort of. China-watchers had been in a tizzy recently over news that Beijing was set to revise its economic statistics. On Dec. 20, the new numbers were released, showing a big jump in gross domestic product, though the increase was more modest than some economists had expected.

The new numbers show that GDP is $1.93 trillion, or 16.8% bigger than previously believed. That means China is the world's sixth-biggest national economy, up from No.7 before the revision (it jumped ahead of Italy). Many economists had been expecting a 20% increase in GDP, which would have put China nearly neck-and-neck with France for the No. 5 spot (see BW Online, 12/16/05,"China's Even Heftier Economy"). Either way, China appears set to overtake both France and Britain in 2006.

The new numbers come from a just-finished economic census. The survey, released on Dec. 20, revealed more accurately the size of the private sector -- especially services. As China has moved quickly toward a market economy over the past two decades, the real impact of new businesses had gotten harder and harder to assess. A big problem was underreporting, to avoid taxes, among business owners (see BW, 2/14/05, "China: Fuzzy Numbers No More?").

NOT AS GRAVE. The new survey sought to improve the number-gathering. The millions of poll-takers who participated in the initiative offered owners of restaurants, massage parlors, car-repair shops, and the like a promise of confidentiality in exchange for real data. The guarantee -- which appears to have been honored -- allowed Beijing to take a much more accurate snapshot of the roaring economy.

That picture revealed more than just the real size of China's economy. As it turns out, the Mainland is also in much better health economically than had been believed. Services accounted for 93% of the increase in GDP, so the improved data show that the services sector represents nearly 41% of China's output, up from 32% last year using the old data. And per-capita GDP was increased to $1,490 from $1,276. That's good because Beijing has long sought to boost consumer spending and limit reliance export-oriented manufacturing.

China's banking sector also looks better. Nonperforming loans fell to 10.7% of GDP from 12.5%, according to brokerage Nomura International. While that's still a big problem, it's not quite as grave as had previously been thought. Similarly, China's ratio of external debt to GDP falls to about 11.8% in 2005, from 13.8% at the end of last year. "From a macro point of view, the [financial sector] is healthier than we originally assumed," Nomura economist Yasuo Sone wrote in a Dec. 20 report.

"CLEARER PICTURE." Granted, China's economic statistics remain far from perfect. There's still tremendous incentive for provincial officials and business owners to both underreport and exaggerate their numbers for various reasons. But the statistics bureau also says it plans to publish revised historical data, which will likely give economists a better handle on trends and improve their ability to forecast future growth.

And the survey yielded a far more comprehensive database of China's companies, especially in services. "Although China's statistical system still has flaws," Sone writes, the new database "should help paint a clearer picture of the economy." That's a picture analysts have been lining up to see.

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Rocks is BusinessWeek's senior international news editor in New York

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